SPV Mortgages

While buy-to-let (BTL) mortgages in personal names are popular if you want to invest in properties for rental income, they have certain limitations. 

Special purpose vehicle (SPV) mortgages were developed to help overcome these limitations.

And in this guide, we’ll be looking at the various aspects of such mortgages, such as their eligibility requirements, advantages, and drawbacks. 

What Is A Special Purpose Vehicle Or SPV?

Before taking a look at SPV mortgages, it is crucial to understand what a special purpose vehicle or SPV means.

An SPV refers to an artificial legal entity, such as a limited company, partnership, or trust, established specifically for owning and holding a buy-to-let property.  

The primary purpose of using an SPV for investing in a buy-to-let property is to help reduce the investor’s personal liability in certain capacities.

This is possible because the mortgages are registered against properties owned by the SPV, which is a separate entity from the investor.  

An SPV is usually established as a private limited company but can also take other forms. Sometimes known as a Special Purpose Entity or SPE, it has its own liabilities, assets, and obligations.

Understanding SPV Mortgages

A special purpose vehicle mortgage or a limited company mortgage allows investors to borrow money to purchase a buy-to-let property through an SPV. In such cases, the name of the entity established is used for taking out the mortgage. 

Since an SPV is usually created as a limited company, its ownership is determined by the number of shares the directors hold. These directors run and manage the company, but the mortgage is taken out by the company and not the directors.

However, directors’ personal circumstances are a big factor that is taken into account during the mortgage application process. 

In addition, the property or properties to be purchased are held by the company, which receives the rental income. An SPV is an ideal solution for investors who wish to keep their personal and business assets separate.

However, taking out an SPV mortgage in certain circumstances can be difficult, which is why it is best to take the help of a buy-to-let broker specialising in such mortgages.  

What Are The Eligibility Requirements For An SPV Mortgage?

Lenders often have different eligibility requirements for an SPV mortgage, but most lenders consider the following factors:

1. Experience

Usually, SPV mortgage lenders need to know that you have some experience as a landlord with BTL properties.

2. Number Of Properties Owned 

You also need to share details regarding the properties owned through a limited company and individually. 

3. Number Of Directors And Shareholders

In most cases, lenders do not allow listing more than four directors in an application for an SPV mortgage. They also require information regarding the number of shareholders in the company and who they are.

4. Property Loan-To-Value 

Depositing a higher amount will provide you with better rates and a greater choice of lenders.

5. Type Of Property 

You may need the services of a specialist lender to invest in a non-standard construction property. 

6. Personal Income And Credit History

Lenders will assess the directors personal income and credit history as part of the mortgage application.

However as it is a BTL property the rental income of the security property is the primary factor when considering mortgage affordability. 

Advantages Of An SPV Mortgage

1. Limited Liability

In a standard BTL mortgage, the personal assets of an individual investor are liable for any outstanding debts, which means the financial risk is greater. However, investing in a BTL property through an SPV can shift the risk to the company. 

However please bear in mind in practical terms this advantage is very limited because of the requirement of personal guarantees from most SPV mortgage lenders (personal guarantees are outlined below). 

2. Tax Benefits 

When taking into account an individual’s personal tax liability, an SPV can be highly advantageous as it can be easier to deduct mortgage interest payments as business expenses.  

This could allow you to reduce your tax bill significantly.  

Also, an SPV pays corporation tax and can get several benefits when any property is owned through it.

It can even help you take advantage of lower tax rates on profits potentially, and tax-free dividend allowances are available, making it easy to divide the profits earned. 

3. Easy Ownership Transfer

Individual investors need to pay Capital Gains Tax when gifting property to family members. The rate is 18% for basic taxpayers and 28% for higher taxpayers.

However, if the investor holds the property through an SPV, it could be possible to add the beneficiary as a shareholder. 

This could, in certain circumstances, help reduce the amount to be paid for example as Inheritance Tax, or offer other alternative benefits.

Disclaimer: When it comes to taxes, this is just general advice and not to be relied upon as fact. When it comes to tax everyone’s position and circumstances are different and the rules are changing all the time. Only by seeking advice of a qualified tax professional can you be certain you are complying with all the relevant tax rules & regulations.

4. Faster Portfolio Expansion

There is no legal limit on the number of properties that an SPV can hold at a time. This makes it an ideal choice if you want to expand your portfolio quickly.

Holding multiple properties simultaneously can mean lesser risk if any property remains vacant. 

Furthermore, for SPV mortgage you can retain profits in the company, further reducing potential personal tax liability and aiding to faster portfolio expansion. 

5. More Favourable Interest Coverage Ratio Requirements

If you invest in a property through an SPV, the interest coverage ratio or ICR is usually lower. The reason for this is typically because of the usual reduced tax liabilities involved with SPV purchases.

While the ICR for individual investors can be as high as 145% or more, it is usually around 125% in the case of an SPV.

This means the rental income should be 125% greater than the mortgage interest payments stressed at a certain interest rate outlined by the lender. 

Disadvantages Of An SPV Mortgage

1. Limited Availability

Not all lenders offer SPV mortgages, and the fees and rates are higher than those for personal BTL mortgages in most cases. 

2. Personal Guarantee Requirement

In all practicality, all lenders will ask for a personal guarantee, which can make the directors of the SPV personally liable for repayment and eliminates any reduced personal risk that would have been gained by setting up an SPV. 

3. Transfer Charges

Capital Gains Tax, legal fees, Stamp Duty Land Tax (SDLT), and higher tax rates are some of the charges incurred when transferring property owned through an SPV. 

4. Responsibilities Of A Director

A director of an SPV has several responsibilities and duties, such as reporting and record-keeping.

They also need to file annual accounts with the Companies House and HMRC which can increase accountancy costs. 

Getting An SPV Mortgage

The process of getting an SPV mortgage is as follows:

1. Consulting A Broker

Since SPV mortgages are niche products, consulting specialist brokers can help you find the best options with the most favourable rates. They can also assist in the application process. 

2. Seeking Legal And Tax Advice

Many lenders require investors to seek independent legal advice alongside applying for an SPV mortgage since these are more complicated than individual BTL mortgages.

An example of this is that it will pretty much always be required when a director gives personal guarantees.

You should properly understand the nuances, terms, and conditions before going through with the application. 

It is always prudent to receive the relevant legal and tax advice from a specialist before starting the process of taking out an SPV mortgage. 

3. Preparing The Required Documents

In most cases SPV mortgages require more documentary evidence than most other types of loans, and you will need to prepare various documents for the application process.

These include evidence of trading history, Articles and Memorandum Of Association of the company, Certificate of Incorporation, Personal Guarantees, and Resolution of the Board.  

FAQs

1. What are the deposit requirements for an SPV mortgage?

For BTL mortgages, the maximum loan-to-value (LTV) is around 85%, but for properties bought through an SPV, the deposit requirements tend to be 20 to 25% as a minimum.

Mortgage products available with a deposit of less than the typical 25% are very rare for both SPV BTL mortgages and BTL mortgages taken out in personal names. 

2. What steps need to be taken before applying for an SPV mortgage?

Before applying for an SPV mortgage, you need to register the SPV with the Companies House like a regular company.

3. What types of properties can you invest in through an SPV mortgage?

You can invest in residential, semi-commercial, and commercial properties through an SPV mortgage. Of course the type of property will affect the lenders you can go to. 

4. How many investors can you have in an SPV?

An SPV can offer possibilities to a higher number of investors pooled together, which provides an increased level of flexibility.  

5. To Whom can a property owned through an SPV be let out? 

In the case of a residential property owned through an SPV, it can be let out to one person, a couple, or a family.

Lenders often do not allow letting out the property to multiple occupants simultaneously unless the mortgage product is specifically designed for House in Multiple Occupation (HMO) or multi unit blocks (MUBS).

It is important to remember that pretty much all SPV mortgages are not regulated loans by the financial conduct authority so the properties must be let out to unrelated tenants.

Conclusion 

SPV mortgages are becoming increasingly popular these days since they provide an effective way of reducing personal tax liability when investing in BTL properties.

They also offer additional benefits, such as making property ownership transfer easy and accelerating portfolio expansion. 

That said, such mortgages come with certain challenges, including higher fees and repayment rates, personal guarantee requirements, and limited availability. Because of this, many people may find such a mortgage unsuitable. 

So, before applying for an SPV mortgage, it is best to consult a mortgage broker who can help you know whether it will meet your requirements and if needed suggest better alternatives. Additionally, always speak to a tax specialist within this area also. 

**A buy to let mortgage will be secured against your property.

Some types of buy to let mortgages are not regulated by the Financial Conduct Authority.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.